Renbud Computer Services Co. (RCS) specializes in customized software development for the broadcast and telecommunications industries. The company was started 30 years ago by three people to develop software primarily for a national network to be used in broadcasting national election results. After sustained and manageable growth for many years, the company has grown very fast over the last three years, doubling in size. This growth has placed the company in a challenging financial position for the coming year. Within 30 days, RCS will need to renew its $300,000 loan, a current liability, with the Third State Bank of San Marcos. Harvey Renbud, president of RCS, is concerned about renewing the loan because of the low amount of cash on hand. The bank has requested RCS's last year's income statement comparative balance sheets for the last two years, and six ratios relating to operating performance and liquidity. RCS Financial Statements Renbud Computer Services Co. Income Statement Last Year Net revenues $2,500,000 Expenses Cost of product services Selling and administration Depreciation and amortization Interest Income Taxes Total expenses Net income $1,500,000 300,000 200,000 60,000 150,000 $2,210,000 $ 290,000 Renbud Computer Services Co. Balance Sheet Past Two Years Assets Last Year Two Years Ago Cash $50,000 $50,000 Accounts Receivable, net 350,000 250,000 Operating supplies and other 70,000 60,000 Equipment, net 1,100,000 900,000 Furniture and fixtures, net 120,000 100,000 Other long-term assets 240,000 200,000 Total Assets $1,930,000 $1,560,000 Liabilities and shareholder's equity Accounts payable $150,000 $130,000 Taxes Payable 140,000 120,000 Note Payable (Third State Bank) 300,000 200,000 Bonds Payable (due in 2002) 400,000 400,000 Total Liabilities 990,000 850,000 Capital Stock (1,000 shares) 100,000 100,000 Retained Earnings 840,000 610,000 Total shareholder's equity 940,000 710,000 Total liabilities and shareholder's equity $1,930,000 $1,560,000 Questions A. Explain why the Third State Bank of San Marcos would be interested in Renbud's comparative financial statements. B. Using Computer Services Co.'s comparative financial statements, ratio calculations, and industry ratios, calculate these financial ratios for RCS Co.: 1. Current ratios for the past two years 2. Accounts receivable turnover for last year 3. Total asset turnover for last year 4. Return on shareholder's equity for last year 5. Debt to equity ratio for the last two years 6. Net profit margin percentage (return on sales) for last year C. Briefly discuss the limitations and difficulties that can be encountered in using ratio analysis.